In the current study, we report two eye movement experiments investigating how Chinese readers process incremental words during reading. These are words where some of the component characters constitute another word (an embedded word). In two experiments, eye movements were monitored while the participants read sentences with incremental words whose first two characters (Experiment 1) or last two characters (Experiment 2) constituted a word (referred to respectively as "head-embedded" and "tail embedded"). Reading times on these words were longer when the frequencies of the embedded words were lower. However, this was only seen on first fixation duration for head-embedded words. These results suggest that embedded words are activated when Chinese readers process incremental words, and that this activation is earlier for a head-embedded word than for a tail-embedded word. These results support a hierarchical model which assumes that the representation for whole word is activated via the representation of its constituent morphemes.